If Google is free, how does it make so much money?

Last year Google made £2.5bn in the UK. So how does a company make so much money when it seems to provide all of its services for free?

Google is an advertising company and its biggest product is you, the user. The company controls almost 90 per cent of the search market in the UK, and almost 96 per cent of Google's revenue still comes from advertising.

Every day the site returns 1 billion search results globally and serves up billions of ads alongside. The secret to success is in the scale of its operation.

The main product is its huge pool of users and extensive data about how they behave online. This data is used to match companies with potential customers, serving up ads that users are more likely to want to click.

Your online habits from YouTube, search and Gmail are all used to profile your behaviour. On top of this, Google follows your surfing habits through its Analytics and Adsense codes, embedded on web pages to track your interests outside of search.

Targeted advertising

Companies use Google AdWords to have their results displayed to specific audiences, thanks to the search engine's advanced algorithms. AdWords is a cost per click service, so if you do not click a link then Google does not make any money directly from your search.

AdWords brings in roughly 70 per cent of the company's advertising revenue. In 2011 the top sectors advertising were finance, insurance, retail and travel and the most expensive search terms were insurance, loans and mortgage.

Google's AdSense allows advertisers to join its network and display ads on its website. A large number of news websites in the UK use this service, so when you log on to scan the headlines, Google makes money and learns more about your browsing habits. Display advertising is usually charged at cost per page impression, because the huge volume of online traffic ads is often sold cheaply at a cost per thousand impressions.

Trusted brand

But Google is not just a search business. It provides maps, cloud computing and documents, email services and a social network. These services are expensive to run but help to draw more users in, build a trusted brand, and gather more vital data about users.

Google is expected to make $3.6bn from YouTube this year as traffic continues to grow and more pre-roll video ads are displayed. But the company is also sharing wealth with users who post popular videos taking in six-figure payments. YouTube has also branched out into a film "rental" site in direct competition with Lovefilm and Nexflix.

The company dominates the mobile market, licensing out its Android operating system for free, but making a large profit from the venture through search traffic, display ads and a percentage of every Play Store sale.

Collecting user data

Google's browser Chrome holds a 30 per cent market share, allowing the company to generate search queries without having to share revenue, as is the case with Firefox and Safari. Chrome provides valuable data about browsing habits for the company, and has been described it as an "exceptionally profitable" product.

All of this data collection has left some customers feeling nervous. But with Google's dominance of the web, it can be hard to escape the company's reach. Google even collects information on the exact location of users, using Chrome and mobile devices.

Google assure users that it anonymises any collected IP addresses after nine months, and cookies in search logs after 18 months, saying this "strikes the right balance" for privacy concerns.